When federal agencies change their interpretive rules, they are exempt from the formal notice-and-comment rulemaking requirements of the Administrative Procedures Act (APA), says the Supreme Court in its recent ruling in Perez v. Mortgage Bankers Association, Case No. 13-1041, issued March 9, 2015.  Under Perez, federal administrative agencies may modify or repeal an interpretative rule in a sub-regulatory publication, such as a manual, without first allowing for prior notice or public comment. 

The Perez ruling reversed the so-called Paralyzed Veterans doctrine, a doctrine stemming from the D.C. Circuit court’s decision in Paralyzed Veterans of America v. D.C. Arena L.P., 117 F. 3d 579 (1997).  Under the Paralyzed Veterans doctrine, an agency was required to use the APA’s notice-and-comment procedures when it wishes to issue a new interpretation of a regulation that deviates significantly from a previously adopted interpretation.  In reversing the Paralyzed Veterans ruling, the Supreme Court relied on the plain text of Section 4 the APA (5 U.S.C. § 553), which prescribes the procedures an agency must use when it engages in rulemaking.  According to the Supreme Court, Section 4 exempts interpretive rules from notice-and-comment requirements, unless another statute states otherwise.  See id. § 553(b)(A).  The Supreme Court concluded that “[b]ecause an agency is not required to use notice-and-comment procedures to issue an initial interpretive rule, it is also not required to use those procedures when it amends or repeals that interpretive rule.”  “The Paralyzed Veterans doctrine is contrary to the clear text of the APA’s rulemaking provisions, and it improperly imposes on agencies an obligation beyond the ‘maximum procedural requirements’ specified in the APA . . . .”   

Although Perez involved an interpretation by the Department of Labor’s Wage and Hour Division (and related to whether mortgage-loan officers qualify for the administrative exemption to overtime pay requirements under the Fair Labor Standards Act of 1938), the decision is notable for health care industry participants, who are often bound by interpretive rules from CMS that are set forth in various Medicare manuals.  Although these manuals are sub-regulatory interpretive rules that technically do not have the force and effect of law, they have the practical effect of being binding on regulated entities, and providers have successfully challenged these interpretive rules based on flaws in the notice-and-comment rulemaking process.  In defending these types of challenges, CMS will now likely rely on Perez in asserting that CMS is not obligated to follow notice-and-comment procedures when it amends Medicare manuals and other sub-regulatory interpretative rules.  Going forward, it is likely that Providers will be subject to altered provisions in Medicare manuals, without such alterations having been subject to notice-and-comment rulemaking. 

Perez is also notable for the concurring opinions of Justices Scalia, Thomas, and Alito, which indicate that the Supreme Court may be interested in reevaluating whether courts should give judicial deference to an agency when the agency interprets its own regulations.  The full text of Perez is available here.

Reporter, Kristin Roshelli, Houston, +1 713 751 3263, kroshelli@kslaw.com.